JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
The general market practice is that, if a class of preferred shares is entitled to a board seat, the lead investor in the class will have the right to designate the class director. Observer rights are sometimes given to large investors that are not eligible for a board seat. Under the Companies Act, if a company cre - ates a new class of shares or takes certain oth - er actions that will adversely affect the rights of existing shareholders, the company must obtain the consent of the holders of two thirds of each class of the company’s shares (including com - mon shares) before such actions are consid - ered effective. In addition to statutory consent rights, preferred stockholders are typically given contractual consent rights with respect to other material matters. The approval of reserved mat - ters usually requires the consent of a specified percentage, such as a majority, of holders of all classes of preferred shares, voting together. 3.7 Contractual Protection In a financing round, the principal contracts include representations and warranties with respect to matters that are commonly covered in many other jurisdictions, including the valid exist - ence of the start-up, its capitalisation, compliance with law, the accuracy of financial statements, the absence of litigation and bankruptcy proceed - ings, and certain employment matters, among other items. One additional item covered by the representations and warranties that may be unique to Japan is the absence of relationships with “anti-social forces.” “Anti-social forces” is a designation under Japanese law for organised crime groups and similar persons that engage in behaviour harmful to society, as well as persons providing support to these groups. It is customary in Japan for commercial and corporate transac - tion agreements to include representations and
warranties as to no relationships with anti-social forces and to allow immediate termination of the agreement if such a relationship arises. The contracts in Japanese VC financings also typically include rights and covenants that are common in other jurisdictions, such as a right of first refusal, tag-along rights, drag-along rights, and certain veto rights for preferred stockhold - ers. It is also common for the founders to agree to remain in their management roles at the start- up, to enter into non-compete obligations in the transaction documentation, and to agree not to dispose of any shares of the start-up. In addition, it is fairly common for founders and the start- up to agree to exercise reasonable commercial endeavours to complete a public listing of the start-up’s stock within a specified number of years (often around six to eight years from the first outside investment round). If the founders or the start-up fail to exercise such efforts, they have an obligation to repurchase the investors’ shares, but these repurchase provisions are very rarely enforced. A breach of warranties or covenants can lead to disputes, with potential breaches of veto rights on material corporate matters being a particular area of focus for investors. In Japan, it is rare to see formal legal claims aris - ing from disputes in VC financings because the potential damages that can be recovered (which are usually quite low compared to other jurisdic - tions such as the United States) in most cases will not justify the cost of bringing the claim. Investors also may conclude that it is not in their best interest to bring suit against the start-up or its management team, because the investors themselves are shareholders of the start-up and the start-up’s success depends heavily on the
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